The Union Budget 2021 -22 has proposed setting up of a Development Finance Institution (DFI) with a capital of Rs 20,000 crore. The government has also set an ambitious lending target of Rs 5 lakh crore in the first three years.
The earlier DFIs like ICICI, IDBI and IDFC and have all converted into commercial banks in the last two decades because of the asset liability mismatches. These DFIs had struggled to get long term funds to finance projects. Today, these DFI turned banks are largely lending to retail assets like home loan, car loan or MSME sectors.
In the last decade, the banking sector did support infrastructure sector, but recent mismatches in asset and liabilities and also higher NPAs have forced banks to withdraw from such lending. Clearly, at a time when economy needs banks and institutions to finance long term infra projects, the commercial banks are moving away.
The proposed new DFI would certainly go a long way in helping infra projects, but will require more funding support from the market as it scales up.
It is not clear how the proposed DFI will get long term funds in future. Learning from the mistake of earlier DFIs, the new DFI will needs risk mitigation strategies because of credit concentration in few sectors which would put the institution at risk in view of any adverse event.
The strategies could be a balanced portfolio in half a dozen sub segments of infra and also geographical diversification.
The proposed DFI should focus on effective monitoring, knowledge based IT systems and use of digital to monitor the sector as well as borrowers in a more rigorous manner.
The long-term lending to infra and other key manufacturing sectors requires project appraisal skills with domain knowledge of the industry. In the past, the banks have under priced the credit risk or not focused on risk adjusted returns. The DFI needs people from areas like risk management, treasury, corporate finance, credit and industry experience.
Currently, there are two government backed platforms supporting the sector -- National Investment and Infrastructure Fund (NIIF) and India Infrastructure Finance Corporation Ltd (IIFCL).
Five years ago, NIIF was created as a quasi-sovereign wealth fund. It is like an alternative investment fund owned 49 per cent by government while remaining shareholding is with banks and international investors. Currently, the scale is a big issue for NIIF which has mobilised close to $4.5 billion funds in the last 5 years. In addition, the focus is only on select assets like transportation and energy. NIIF, which has a private equity model, also invests in funds managed by others.
IIFCL, on the other hand, is 15-year-old deposit taking NBFC, which is wholly-owned by the government . Here again, the scale is missing as it has loan book of Rs 1.5 lakh crore with one fourth of its book neck deep in NPAs. The loan exposure of IIFCL is also concentrated in two sectors - Power and Roads with over 80 per cent outstanding loan. There is a high dependence on govt for equity support.